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The United States Federal Reserves spooked the market on Wednesday, after it announced an increase in interest rates and hinted that two more hikes could be coming this year.
According to reports,“Ten-year U.S. Treasury note yields hit a one-week high, while two-year note yields rose to a three-week peak after the Fed’s decision to raise its benchmark overnight lending rate a quarter of a percentage point, to a range between 1.75 percent and 2 percent.”
Over the last few weeks, investors had anticipated a rate hike this week and flew to safety by dumping several emerging-market assets. A rate hike or tightening is a signal that the United States Federal Reserve (Central Bank) wants to cut back on the monetary expansion that has ensued since the global economic crisis of 2008.
Following the great recession of 2008-2010 that gripped developed markets across the world, United States, Japan, and Europe dropped rates to as low as zero percent, thereby injecting money into the banking system. Some of this cash found its way into emerging markets like Nigeria and was a major contributory factor to rise in the value of the stock market pre-oil price crashes in 2014.
Economies of developed markets have since picked up in the last two years with modest GDP Growth rates, and unemployment rates at historical lows. As stability returns to developed markets, attention has now turned towards sustainability while reducing the risk of any market melt-down due to cheap credit flowing across the world.
How does it affect Nigeria and your investments
If you have been following events in the stock, forex and fixed income markets, then you may have noticed that we are already experiencing the consequences of this rate hike. Last May, the Nigerian Stock Market closed in negative territory for only the 8th time in over 30 years.
This resulted in a complete wipeout of the gains recorded in the stock market for the whole year. For example, Nigerian pension funds took a major hit in May from the month’s volatile stock markets, suffering a drop in their performance for the first time in a very long while, analysts at Quantitative Financial Analytics have said.
According to the analysis, the pension funds that suffered the losses are those with equity market exposure of greater than 11%, as pension funds that allocated less than 11% of their assets to equities were spared the pain.
One of the major factors for the decline is attributed to the sell-offs experienced in the hands of foreign portfolio investors who have mostly exited their positions ahead of the rate hikes.
MSCI Nigeria Index tracked by foreign investors investing in Nigeria’s equity market.
That is not all. The Central Bank has also increased its defence of the naira by first mandating commercial banks and bureau de change operators to sell forex to Nigerians who require it for retail usage such as traveling or paying for school fees abroad. They went further and merged the rates at which FX is sold by both commercial banks and the BDCs.
Latest data from the CBN also indicates that the spate of the rising forex reserves recorded in the last few weeks has reduced with the CBN dipping its hands to fund a potential liquidity in the market.
Nigeria’s external reserves has since dipped from about $47.9 billion to about $47.4 billion.
Any reason to panic?
As opined in our series of articles covering this development, Nigeria’s economic fundamentals still remain resilient and we are cautiously optimistic that we will weather the storm. We could experience more sell-offs (even though June has largely been positive) but this could be an opportunity to pick up some of the stocks that have eluded investors since the rally that began last year.
But, the Bankers’ Committee, the umbrella body of managing directors of banks in the country and top officials of the Central Bank of Nigeria (CBN), said it recognised the mixed signals that are coming from the global economy
Ahmad Abdullahi, Director, Banking Supervision, Central Bank of Nigeria (CBN), who disclosed this at the end of the committee’s meeting in Lagos on Thursday, said the committee was sure that the CBN had enough shock absorbers to curtail the negative developments.
“Despite the mixed signal in the global economy and the likelihood of capital outflow, the CBN is expected to deal with the situation to ensure stability in the forex market.
“Generally, the Bankers’ Committee realised that the CBN has enough arsenal to ensure we have a stable exchange rate and that any demand for forex will be met to ensure liquidity in the foreign exchange market.”
He added that developments in the domestic economy were good signals for the managers of the economy to be able to withstand the foreign pressure.
“We also recognised the positive outlook of the domestic economy. We are seeing inflation coming down to 11.6 percent. Our reserves have grown to $48 billion and the GDP is estimated to be 2.4% by the end of 2018,” Abdullahi said.
Other chief executives of banks expressed optimism that Nigeria’ current position was that of strength, as it can deal with any real or perceived threats.